- 23 Mar 2023
- ICICIdirect Research
US Federal Reserve raises rates by 25bps in line with market expectations
US Federal Reserve raised its interest rate by 25bps taking it to the range of 4.75%-5.0%, the highest level since September 2007. Fed signaled that banking system turmoil might end its rate hike campaign sooner than anticipated. Fed Chair Powell said policymakers had consider skipping rate hike after banking stress intensified. Further, policymakers had dropped a phrase which they used in their previous statements that said committee anticipated “ongoing increases” in rates would be appropriate and replaced it with “committee anticipates that some additional policy firming may be appropriate"
As per the latest dot plot almost all 18 officials expect the fed fund rates to peak at 5.1% implying one more 25bps rate increases and no rate cut this year. 7 officials sees rates going higher than 5.25% this year. Officials see rates coming down to 4.3% in 2024.
After the FOMC meeting Dollar and Yields slipped. US 2 year yield most sensitive to Fed policy expectations tumbled to 3.94% and DXY declined near 102.50 levels.
We expect Dollar Index to slip further till 101 levels in the coming days on anticipation that Fed may put a pause on monetary tightening due to banking system turmoil. Additionally, Powell’s comment that Fed will use all tools available to keep banking system safe were contradicted somewhat by US Treasury Secretary Janet Yellen. She said Federal Deposit Insurance Corporation (FDIC) was not considering providing "blanket insurance" for banking deposits following the collapse of two U.S. banks earlier this month, and that a failure of a small or community bank could ignite runs on bigger banks